Time for a Finance Re-Think?
With inflation and interest rates still on the rise, right now you may be:
- considering the direction of the economy
- reflecting on recent experiences with your development lenders, and
- assessing your future financing options
With changes in project costs, and the entry of several new lenders, now is an excellent time to conduct a strategic review.
The best way to start is with a series of strategic questions, as below.
But first, where are you currently?
1. Reflecting Back
If you are conducting a thorough review, it could be for a number of reasons.
Firstly, you might fancy a change. Perhaps you’ve worked with the same lender for a long time, and whilst they’ve by and large worked well, you know the marketplace has changed a lot, with a variety of new lenders who might be better options.
Secondly, you might be reviewing because you’ve had some negative lending experiences, be that with the lender, the broker, the surveyor or the lawyers.
Perhaps you had:
- a torturous completion, with a lack of communication between all parties resulting in one set of lawyers being nowhere near completing compared to the other (not uncommon!).
- or cashflow issues as a result of a surveyor down-valuing your site in your view, and lenders being unable to come up with the funds you need.
- or you’ve felt on your own with the lender, with no-one there to give you much needed support throughout.
If you can relate to some of this (or all of this!) then I hear you loud and clear.
But now you ask, what is the best way to move forward?
2. Questions Give You the Answers
I’m a big believer that asking yourself the right questions helps you come up with the answers you’re looking for.
Below are 7 sets of questions to muse over as follows:
- Lending Questions
- Communication Questions
- Market Analysis Questions
- Ideal Lender Questions
- Profit Margin Questions
- Contractual Questions
- Summary Questions
3. Lending Questions
- Were you over time and over budget? Why?
- If so, how did the lender work with you on that?
- In any difficult cashflow situations, was the lender flexible or not?
- Did you analyse the finance cost after completion of the project?
- Have you compared the eventual cost of finance against the projected interest in the term sheet? If it is different, why was it different?
(Side note: most people only concentrate on the cost prior to the project, not after. Did the lender live up to expectation or was the projection way off? Why was that?)
4. Communication Questions
- How was the communication between all parties from start to finish?
- Did the lawyers, QS and lender work well during the loan application and legals phase?
- If a broker was involved, did they help well during the application, and more importantly, were they there for you during the build to help liase with the lender?
- Did they do some of the leg work for you, or got involved when you need them to, to resolves issues with the lender? Or were you left to your own devices?
5. Market Analysis Questions
- Did you get a good overview of the marketplace when selecting last time?
- What were the reasons you selected the last lender?
- Did the lender you selected perform as you wanted?
- Have you the ability, right now, to assess the best 50+ options in the marketplace, instantly?
- Have you a strong foundation in how today’s lending products differ?
- e.g. how lenders 'cashflow your build costs' differently that hampers comparison, and how lenders apply interest rates differently that hampers comparison?
6. Ideal Lender Questions
The ideal type of lender you may want can vary enormously, depending on your risk profile.
Ask yourself these questions:
- Are you happy with your risk profile? The more cautious you are, the less debt you want to take on, which means putting down more cash than you may need to with some lenders. So…
- Do you want to put down as little cash as possible, which often means paying a bit more in interest, or do you like putting more cash down to get a better rate?
- Are you absolutely sure that doing it one way is cheaper than the other, if that is your goal?
- Do you want to use one lender per project, or multiple sources for the same project? Depending on how much cash you’ve got, or wish to put in, you use various i.e. senior stretched and own cash, or senior stretched + equity investment? Or senior, plus mezzanine and or equity investment?
- Have you analysed which scenario is cheaper, should that be your goal?
- Have you considered using a different lender for each project, thereby diversifying risk and learning more about the marketplace from a practical standpoint?
7. Profit Margin Questions
Any developer will know that profit margins are being squeezed, and now more than ever.
One has to be smart in order to get the margins you’re looking for.
- If you build traditionally, have you considered the new quick build technologies, which can dramatically reduce the time a project takes, and therefore a lot of cost too?
- If importing materials, would hedging, or reviewing your hedging arrangements be wise in the current environment?
- Are you allowing for enough contingency, which can be funded, thus saving you on funds if the projects overruns on cost?
- If you prefer not to fund contingency, are you keeping enough cash back in case a lender cannot provide further funds in a cost overrun scenario?
8. Contractual Questions
One area that is always under review, or could be causing you problems, is the legal and contractual side.
Some of the areas to question are as follows:
- Lawyers - did you use lawyers that have specific development finance experience, or only conveyancing? Using only conveyancers can cause many problems that are unnecessary.
- QS - did you like them and how they worked?
- Collateral Warranties - how difficult was this, and have you considered a potentially easier route with TPRs?
- Anyone charging upfront fees – how did they perform in the long run, and were they worth it?
In summary then, a strategic review from time to time is useful, and having the right tools to think it through is helpful too!
I would close with a few big picture questions that may also help:
- Are you on top of the current marketplace and its options?
- What is it you want from a lender?
- Have you prepared well for the next project?
- What level of support are you looking for from third parties?
If you're looking to go it on your own, hopefully this set of questions will guide you in the right directon.
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